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Factors Setting the Tone for Microsoft's (MSFT) Q4 Earnings

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Factors Setting the Tone for Microsoft's (MSFT) Q4 Earnings

Microsoft (MSFT) Q4 results to benefit from cloud computing initiatives & Azure Adoption. Also, Office 365 & synergies from acquisitions bodes well for the company.

Microsoft Corp. MSFT is set to report fourth-quarter fiscal 2018 results on Jul 19 after the closing bell. Notably, the company has a positive record of earnings surprises in the trailing four quarters, with an average beat of 19.5%. In the last reported quarter, the company delivered a positive earnings surprise of 11.8%.

In the last reported quarter, the company delivered earnings of 95 cents per share, which outpaced the Zacks Consensus Estimate by a dime. The figure rallied 35.7% on a year-over-year basis. Revenues of $26.82 billion increased almost 15.5% from the year-ago quarter (up 13% in constant currency or cc). Further, the figure exceeded the Zacks Consensus Estimate of $25.71 billion.

Notably, the stock has returned 43.1% in the last year, outperforming the industry’s rally of 34.2%.

What to Expect?

Microsoft is projected to witness quarterly sales rise to $29.17 billion, based on Zacks Consensus Estimate, which would mark an 18.1% year-over-year ascent. The company is anticipated to observe its bottom-line expand by 9.2% to reach $1.07 per share.

Factors to Consider

Cloud Computing Initiatives& Azure Adoption: Key Catalysts

Microsoft’s acquisition of the open-source software development platform giant, GitHub will help the company in becoming more future-oriented by encouraging more developers to create services and apps. This in turn will aid Azure to compete better against other computing giants by being more appealing to customers.

The GitHub-Azure integration will further strengthen Microsoft’s commitment to its cloud-computing future as it aims to compete against the likes of Amazon AMZN and fellow tech giants.

The tech powerhouse projects the acquisition to be accretive to non-GAAP operating income in fiscal 2020. Investors should note that Microsoft expects the buyout to dilute adjusted earnings by roughly 1% in fiscal years 2019 and 2020.

Microsoft is also committed to reorganize the company around its cloud-computing businesses and its Office business, instead of Windows. Last quarter, Microsoft’s Intelligent Cloud unit revenues, comprising its rapidly growing Azure segment, climbed roughly 17.3% to reach $7.89 billion.

The high point was Azure revenues, which soared 89% at cc on a year-over-year basis. Microsoft stated that Azure premium revenues grew triple digits for the 15th consecutive quarter. We believe that robust adoption of Azure will continue to drive Microsoft’s top-line in the soon-to-be reported quarter.

The Zacks Consensus Estimate for revenues for the Intelligent Cloud segment is currently pegged at $9.077 billion, up 24% year over year.

Office 365 & Alliances Drive Growth

Productivity & Business Processes includes the Office and Dynamics CRM businesses. Last quarter, revenues jumped 16.9% (up 14% at cc) on a year-over-year basis to $9 billion. Office 365 commercial revenues grew 42% driven by strong installed base growth and average revenues per user (ARPU) expansion primarily due to customer migration to premium workloads in E3 and E5.

Microsoft also continues its acquisition spree. The company recently announced deal to buy Bonsai, an artificial intelligence-based (“AI”) startup. Microsoft sees a lot of potential in Bonsai’s “reinforcement learning” skills in industrial AI. Microsoft will utilize Bonsai capabilities to power its Azure AI platform.

We believe Microsoft is on the right track, given its increasing inclination toward AI. The company’s focus on strengthening presence in the AI market is evident from the acquisition of Berkeley, CL-based Bonsai. Notably, in the past month, Microsoft acquired Semantic Machines, which introduced an extensive approach for the development of conversational AI to advance its digital assistant Cortana.

Microsoft also acquired Minneapolis-based startup, Flipgrid. The startup is an interactive social learning app for teachers and students with a collaborative approach. With the acquisition, Microsoft has strengthened the social learning movement. The students will be the primary beneficiaries.

We believe Microsoft is exploring the entirety of education technology market with the Flipgrid buyout, as it is likely to provide the company a unique edge in this software edtech space.

The Zacks Consensus Estimate for revenues for the Productivity and Business Processes segment is currently pegged at $9.687 billion, up 15.9% year over year.

Self-Driving Initiatives & Gaming Bode Well

Microsoft collaborated with Mapbox Inc, a mapping startup. Microsoft Azure IoT platform’s open sourced Azure IoT Edge Runtime will be integrated with Mapbox’s recently unveiled Vision SDK. With the tie-up, Microsoft will be able drive the autonomous vehicle revolution forward.

Microsoft is leaving no stone unturned to capitalize on the immense growth opportunity of autonomous vehicle industry. In fact, the tech giant is driving innovations through partnerships and collaborations, consequently bolstering initiatives.

The company is also one of the largest providers of gaming hardware. The Xbox One X has a wide adoption rate. Moreover, robust performance of its surface line of devices is driving the top line.

Notably, the company stole the limelight at the ongoing Electronic Entertainment Expo (E3) 2018. It unveiled 52 games, comprising 15 world premieres, 18 Xbox One and Windows 10 exclusives.

We believe, the new console is likely to help the company gain momentum against Sony as well as other industry peers like Nintendo. The improved technical features, which will eventually lead to higher resolution and faster loading of the games, are expected to add to its customer base.

The aforementioned initiatives in the emerging technologies space is likely to boost the top line, going forward.

Zacks Rank & Key Picks

Currently, Microsoft carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector are Intel Corporation INTC and Twitter, Inc. TWTR, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The projected long-term earnings growth rate for Intel and Twitter are 8.4%, and 23.1%, respectively.

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